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Factors that Determine Rates on Portfolio Protection Insurance for Lenders

Trust and Relationship

I placed this first intentionally because it is the most important by far. Customers, borrowers, and members want a service provider that is trustworthy and see the bigger picture of a long-term relationship. They will use your products because of the great service you provide, and the value you bring to them as a trusted financial advisor. Good agents and insurance companies operate under the same principles.

The viability of insurance products that protect a lenders portfolio depends on trust and relationship to ensure that reasonable coverage and pricing can be maintained over time. A good working relationship with your provider can yield big dividends for both sides over the long run. In return for a fair premium, your provider should pay claims in a timely manner while also making sure you understand what coverage and/or limitations are, as outlined in your policy. We all know that at times there are those gray area claims that an insurer can find a way to deny or find a way to pay. You want the type of relationship where they find a way to pay the claim.

Type of Lending and Collateral

When determining price, underwriters look at the percentage of direct and indirect loans through dealers that are being made, as well as, overall credit quality. In most situations, the higher the percentage of dealer lending, along with lower overall credit quality, the higher the number of claims. That's not always true however, and really depends on the types of dealer loans that a lender is pursuing. Credit quality is an extremely important factor and that is no surprise to anyone. Collateral mix is also an important factor in portfolio protection pricing. For example, larger ticket items such as boats and RV 's are typically more difficult to resell when repossessed and often have a high rate of depreciation which leads to increased deficiency balances. Also, if skip coverage is included on a collateral protection policy, smaller units like motorcycles and ATV's are harder to locate and ultimately end up increasing losses.

Historical Data

To establish proper pricing, it is extremely important for lenders to provide agents and underwriters with as much historical data as they can. The last two to three years’ worth of premium and claims experience, coupled with type of claims paid data is most helpful. What's happened in the past many times repeats itself. If the last few years for you have not performed very well then make sure you provide as much information as you can and explanations if there were any claims or situations out of the norm for you. If you really believe that the claims will continue or may even get worse, just tell your provider that. It's better to get coverage and pricing that is going to last than to be battling with the insurance company regularly over the pricing, claims, and even keeping the program in place.

Expected changes in the portfolio

We ask lenders if they expect any change in credit quality or any change in volume in the coming 12-24 months. Any other factors that could affect the portfolio in a positive or negative way should be discussed with the provider so that the best program and proper pricing can be put in place.

Geographical Considerations

Every part of the country has different risks that need to be addressed when underwriting collateral protection programs. Some areas have more hail damage, while some have more flooding, hurricane activity, or earthquakes. Northern states have winter weather to deal with. Western states have more risk of wildfires. Urban areas have more accidents. All of these factors are considered during the underwriting process.

Industry Trends

We take into consideration whether the amount of claims and the severity of claims on each product has been stable, increasing, or decreasing. For example, at present, the insurance market is experiencing higher claim payments on products like VSI, GAP, and CPI. Higher vehicle prices, higher replacement cost for parts, and quickly spiking costs of repair to vehicles due to increased technology, has led to a quick climb in the dollars that insurers are paying out on CPI, VSI, and GAP over the last couple of years. Longer term auto loans and increased loan to values because of negative equity on trade-ins have also had an effect due to higher default rates and deficiency balances.

Coverage Offered

There are so many different types of coverages that can be offered on lender protection programs that you and your provider must clearly stake out what you need and want. Having a solid consultative relationship with your provider is important to help determine the level of coverages that will provide the best protection for your institution. The higher the coverage levels and the lower the deductibles the higher the price will be. For long-term insurance protection and stability, rates may come at a higher price for a quality service, stress-free claims handling, and increased coverage with low deductibles. Comprehensive coverage levels ultimately lead to increased claims paid by the insurance company, therefore they need to be protected with higher prices for taking that risk. A lender can compare this to charging higher interest rates on certain loans because of increased risk and the cost of better overall service to your borrower.

Product Specific Considerations

Product specific factors are also considered when pricing policies. For example, on GAP waivers we look at the percentage of loan-to-value at origination, average term, average new loan size, percentage of new versus used vehicles, and average term to payout. For VSI it is important to know the number of repossessions you average, your delinquency percentage, and whether or not those numbers are increasing or decreasing. Each product has specific nuances that affect pricing. A good agent and underwriter will ask you a lot of follow up questions before quoting.

All of these factors along with the experience of the agent and underwriter determine what is the best package of coverage and pricing that has a reasonable chance of lasting over time. If it sounds too good be true, it probably is. Experience in these product lines is important because they are very specialized and there are a limited number of providers. A good provider knows that not every account fits into a tight, simple underwriting box or spreadsheet. Experience can lead an agent or provider to recommend rates and coverages to you that are commensurate with the risk. Agents and lenders along with insurance companies want these products to last since they benefit us all. In order to do that they have to be priced wisely, sold and purchased under the umbrella of trust and a long-term relationship.